August 24, 2007
How Does One Get the Market Off Crack Cocaine??
The Fed has a tough job ahead. The market is hooked on the crack cocaine of cheap credit. The addiction has fueled crazy lending and crazier investing. Cold turkey withholding of the cheap credit has led to severe withdrawal symptoms, tremors and shakes, and has the addict whining for another fix. Yet facilitating a return to the full habit will reward the addicts and cause a resumption of the crazy lending. The struggles required to get an addict off the habit of cheap credit should remind the us (and the FED) that it is easier and better to prevent the habit from forming in the first instance.
Target Board Behavior in Buyouts
The recent market troubles should remind us (and the courts) that occasionally speed and not a time consuming market canvas are good for investors of targets in buyouts. The board of Alltel moved swiftly to accept a 27.5 billion buyout offer from TPG Capital (and Goldman) and took heat from many would wanted the board to take longer to auction the company. It now appears that delay would have been very costly and may have scuttled any deal. Alltel investors will be very happy to close the one they have.
Bank of American Buys Stake in Countrywide
Bank of American bought 20,000 shares of Countrywide preferred stock for $2billion. One would think that Countrywide and its CEO would be delighted. But an interview with Countrywide CEO Angelo Mozilo found him less than enthusiastic. Why? This is not ordinary, garden variety preferred stock. First it is convertible into common at $18 when the market price of common is $22 or so; it is in the money. Second it carries a preferred dividend of 7.25%, huge considering the conversion feature is in the money. And third, it comes with a boatload of protective covenants. The covenants will give Bank of American substantial say in how Countrywide will do business. The hidden secret in modern special preferred stock offerings is that they come with covenants that, in essence, take the company, or at least the value of the company, away from other shareholders. Mozilo should be sorrowful; he has ceded a substantial amount of control.
August 21, 2007
Zell and the Tribune Deal
The Zell $8.2 billion buyout of the Tribune Company will show some final surprises. At the time the deal was negotiated it was to have established a company with a razor thin ability to cover the new debt. Since that time, Tribune revenue has fallen further and the credit markets have tightened (driving up interest costs). Some say that there are two choices: cancel or renegotiate the deal. Is there a third choice? Let the deal close. The new company becomes insolvent and Zell buys the company from the bankruptcy trustee. He has used something like this before on real estate affected by the S&L bailout. In any event, there will be some final surprises.
As noted several days ago, the current market conditions are causing private equity buyout firms that have signed and not yet closed large buyouts to ask their lawyers to read the deal paper and look for exits. The buyers are finding that the credit markets are very tight and make placing agreed debt financing very expensive. Some deals have "reverse breakup fees" that enable the buyer to walk simply by paying a chunk of cash. I suspect that buyers are looking for ways to walk that do not trigger the reverse breakup fee. Using the old fashioned way, they are looked for failed conditions and breached covenants.
The Fed's Friday Action
I have read with much interest the financial news's explanation of the Fed's Friday morning decision to reduce the discount rate. What is missing in the explanations if a description of why the market on Thursday, after twice bottoming out at a minus 300 plus points on the Dow, came back at the end of the day to finish more or less even. What caused the market to spike upward on the close? And why did the Fed act regardless of the final upward spike on Friday morning? Rush Limbaugh claims that his program (and a caller stating that it was now "time to buy" just after lunch) drove the market back up. I doubt it. The most obvious explanation is that the problems in the money market caught the Fed's attention and officials at the Fed began making phone calls to check things out. The phone calls and other discussions perhaps tipped some in the market off that the Friday morning action was coming and those traders with well grounded suspicions drove prices up. How does the Fed get critical information without tipping some in the market. Even an increased frequency of focused Fed calls (on the money market condition, for example) would do it. I am on the outside looking in, but Thursday sharp upward spike at the close looks suspicious and merits investigation.